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Midwest Independent Transmission System Operator, Inc. v. Federal Energy Regulatory Commission

November 12, 2004

MIDWEST INDEPENDENT TRANSMISSION SYSTEM OPERATOR, INC., PETITIONER
v.
FEDERAL ENERGY REGULATORY COMMISSION, RESPONDENT NEW YORK INDEPENDENT SYSTEM OPERATOR, INC., ET AL., INTERVENORS



On Petitions for Review of Orders of the Federal Energy Regulatory Commission

Before: Rogers, Tatel, and Garland, Circuit Judges.

The opinion of the court was delivered by: Tatel, Circuit Judge

Argued October 7, 2004

Obligated by statute to recoup its costs from industries it regulates, the Federal Energy Regulatory Commission funds its electricity-related programs through annual charges to public utilities based on the volume of electricity they transmit. In this case, two transmission providers, having unsuccessfully petitioned FERC to base those charges on sales as well as transmissions -- an approach the Commission once followed but has now abandoned -- ask this court to order FERC to reconsider its position. They argue that changed circumstances warrant a new rule because in the wake of severe disruptions in California and other western electricity markets, FERC has shifted its focus from transmission to sales -- an allegation FERC vehemently disputes. Because we order rulemaking "only in the rarest and most compelling of circumstances," WWHT, Inc. v. FCC, 656 F.2d 807, 818 (D.C. Cir. 1981), and because we defer to an agency's view of its own regulatory priorities, we deny the petition for review.

I.

The Omnibus Budget Reconciliation Act of 1986 (the "Budget Act") requires that "the Federal Energy Regulatory Commission shall, using the provisions of this section and authority provided by other laws, assess and collect fees and annual charges in any fiscal year in amounts equal to all of the costs incurred by the Commission in that fiscal year." 42 U.S.C. § 7178(a)(1). "The fees or annual charges assessed shall be computed on the basis of methods that the Commission determines, by rule, to be fair and equitable." Id. § 7178(b).

FERC first implemented section 7178 with respect to electricity regulation through Order No. 472 in 1987. See Annual Charges Under the Omnibus Budget Reconciliation Act of 1986, Order No. 472, [Regs. Preambles 1986-1990] FERC Stats. & Regs. ¶ 30,746, 52 Fed. Reg. 21,263 & 24,153 (1987), clarified, Order No. 472-A, [Regs. Preambles 1986-1990] FERC Stats. & Regs. ¶ 30,750, 52 Fed. Reg. 23,650 (1987), on reh'g, Order No. 472-B, [Regs. Preambles 1986-1990] FERC Stats. & Regs. ¶ 30,767, 52 Fed. Reg. 36,013 (1987), on reh'g, Order No. 472-C, 42 F.E.R.C. ¶ 61,013 (1988). That order assessed charges based on the twin aspects of FERC's electricity jurisdiction: transmission and wholesale sales in interstate commerce. In early 2000, FERC proposed updating the assessment methodology in light of "sweeping changes" in the electricity industry. See Revision of Annual Charges Assessed to Public Utilities, [Proposed Regs. 1999-2003] FERC Stats. & Regs. ¶ 32,550, at 33,917 (proposed Jan. 28, 2000), 65 Fed. Reg. 5,289, 5,291 (Feb. 3, 2000) (" Revision of Charges NOPR "). Whereas vertically integrated public utilities once provided "bundled" generation and transmission service to customers in a local market, a series of FERC orders in the 1990s required "functional unbundling" of transmission and generation services, mandating nondiscriminatory access to interstate transmission facilities and encouraging utilities to place transmission assets under the control of independent entities such as "independent system operators" ("ISOs") and "regional transmission organizations" ("RTOs"). See generally Midwest ISO Transmission Owners v. FERC, 373 F.3d 1361, 1363-65 (D.C. Cir. 2004); Pub. Util. Dist. No. 1 of Snohomish County v. FERC, 272 F.3d 607, 610-12 (D.C. Cir. 2001) (per curiam).

Because FERC's new initiatives meant increased focus on "assuring open and equal access to public utilities' transmission systems," as opposed to monitoring wholesale electricity rates, FERC proposed to "assess our electric regulatory program costs solely on the MWh of electric energy transmitted in interstate commerce by public utilities, rather than, as in the past, on both jurisdictional power sales and transmission volumes." Revision of Charges NOPR, [Proposed Regs. 1999-2003] FERC Stats. & Regs. at 33,920, 65 Fed. Reg. at 5,292. FERC pointed out that sellers, though not charged directly, would bear a portion of the charges through higher transmission rates. Id. at 33,920-21, 65 Fed. Reg. at 5,292. In October 2000, following notice and comment, FERC adopted the new policy in Order No. 641. See Revision of Annual Charges Assessed to Public Utilities, Order No. 641, [Regs. Preambles 1996-2000] FERC Stats. & Regs. ¶ 31,109, 65 Fed. Reg. 65,757 (2000) (codified at 18 C.F.R. § 382.201), on reh'g, Order No. 641-A, 94 F.E.R.C. ¶ 61,290, 66 Fed. Reg. 15,793 (2001).

Meanwhile, the electricity industry had entered a crisis. Beginning in June 2000, wholesale prices in California and other western states, driven by a combination of high gas costs, unusual weather, and slack supply, climbed to what FERC later called "unprecedented" levels. See FERC, Annual Performance Report for Fiscal Year 2001, at 1, 5 (Mar. 2002), http://www.ferc.gov/about/strat-docs/FY01-PR.pdf ("FY2001 Report"). As a result, retail costs in some areas rose by 200 to 300 percent, while two major California utilities, barred by state law from raising retail prices yet forced to buy power at short-term market rates, incurred crippling debts. See In re Cal. Power Exch. Corp., 245 F.3d 1110, 1114-16 (9th Cir. 2001) (" CalPX "); FY2001 Report at 5. In response, FERC intervened and canceled a mandatory spot market, thus freeing utilities to enter long-term forward supply contracts. See CalPX, 245 F.3d at 1116-18; FY2001 Report at 5-6. At the same time, FERC launched an investigation of market problems and eventually ordered refunds for excessive wholesale prices. See CalPX, 245 F.3d at 1118-19; FY2001 Report at 5-6.

Caught off guard by the California debacle, FERC was contrite, stating in its FY2001 Annual Performance Report, "we have a duty to change the way we do business in light of the Western energy crisis." FY2001 Report at 7. Accordingly, FERC adopted a new "Strategic Plan," a "first-ever Business Plan that will encourage much more conscious allocation of resources to the highest priority issues facing us," and "[n]ew performance measures, designed to build accountability into all our activities." Id. In its performance report for the following year, FERC proclaimed "a new sense of focus and direction" and "an increased emphasis on market oversight and investigation." FERC, Annual Performance Report for Fiscal Year 2002, at 5-6 (Feb. 2003), http:// www.ferc.gov/about/strat-docs/FY02-PR.pdf ("FY2002 Report"). FERC established an Office of Market Oversight and Investigation ("OMOI") charged with "mak[ing] sure that energy markets work," id. at 9, and published notice of a major initiative to standardize wholesale electricity markets throughout the United States, see Remedying Undue Discrimination Through Open Access Transmission Service and Standard Electricity Market Design, [Proposed Regs. 1999-2003] FERC Stats. & Regs. ¶ 32,563 (proposed July 31, 2002), 67 Fed. Reg. 55,452 (Aug. 29, 2002) (" SMD NOPR "); FY2002 Report 7-9. While "put[ting] in place sufficient regulatory backstops to protect consumers against the exercise of market power when structures do not support a competitive market," this "standard market design" ("SMD") proposal aimed "to remedy remaining undue discrimination and establish a standardized transmission service and wholesale electric market design that will provide a level playing field for all entities that seek to participate in wholesale electric markets." SMD NOPR, [Proposed Regs. 1999-2003] FERC Stats. & Regs. at 34,281, 67 Fed. Reg. at 55,455.

FERC nonetheless stuck with Order No. 641 and assessed the first charges under the new system in July 2002. Though FERC had denied a rehearing request shortly after issuing Order No. 641, see Revision of Annual Charges Assessed to Public Utilities, Order No. 641-A, 94 F.E.R.C. ¶ 61,290, 66 Fed. Reg. 15,793 (2001), the New York Independent System Operator, Inc. ("NYISO") and other transmission providers filed fresh challenges based on their first bills. Among other things, they argued that the SMD proposal evidenced an attention to wholesale markets inconsistent with FERC's assumptions in promulgating the new system. While insisting its focus remained on transmission, FERC denied the petitions as untimely collateral attacks on Order No. 641. Cal. Indep. Sys. Operator, Inc., 101 F.E.R.C. ¶ 61,043 (2002). In response, NYISO, joined this time by the Midwest Independent Transmission System Operator ("MISO") and one other transmission provider, filed a rulemaking petition urging FERC to reconsider the order. The Midwest ISO Transmission Owners -- the group of utilities owning transmission assets controlled by MISO -- filed comments in support of the petition. FERC denied the petition, see Midwest Indep. Transmission Sys. Operator, Inc., 103 F.E.R.C. ¶ 61,048 (2003), and when MISO and the MISO Owners (to whom we shall refer collectively as "MISO" throughout this opinion) sought a rehearing, FERC denied that as well, see Midwest Indep. Transmission Sys. Operator, Inc., et al., 104 F.E.R.C. ¶ 61,060 (2003).

MISO now petitions for review of these two orders. NYISO has intervened in support.

II.

Although both parties assure us that we have jurisdiction over this case, we have an independent obligation to be certain. See Steel Co. v. Citizens for a Better Env't, 523 U.S. 83, 94-95 (1998). We may consider petitions filed directly in this court -- as was MISO's -- only if Congress has provided for initial review in the courts of appeals. Otherwise, parties challenging agency action must first seek relief in the district court, proceeding to this court only on appeal -- a procedure confusingly termed "non-statutory review." See Five Flags Pipe Line Co. v. Dep't of Transp., 854 F.2d 1438, 1439-40 (D.C. Cir. 1988). In this case, the jurisdictional basis advanced by the parties, 16 U.S.C. ยง 825 l (b), is open to question because it applies only to orders issued in proceedings "under" the ...


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